Today's announcement that Citigroup (NYSE: C) will take $49 billion worth of Structured Investment Vehicles (SIVs) onto its balance sheet suggests to me that its new CEO is following a path I wrote about earlier this week -- the first step of which is to take a big bath write-down fast. I think Citi stock will fall further before hitting bottom -- say $15.
Why is Pandit doing this? First, investors give a new CEO a chance to put all his predecessor's mistakes in the past through a write-down -- which generally includes closing businesses and firing staff. Second, Pandit probably realized that the alternative -- a fire sale of securitized assets (the average net asset values of SIVs tumbled to 55% from 71% a month ago and 102% in June) -- would be the lesser of two evils.
Nevertheless -- Pandit's move came with pain attached. Bloomberg News reports that two hours after Citi's announcement, Moody's Corp. (NYSE: MCO) lowered its credit ratings to Aa3, the fourth-highest level, from Aa2, saying "capital ratios will remain low." Citi's capital ratio is likely to tumble far below its target -- causing it to take further capital preservation moves. Specifically, its Tier I capital ratio is likely to hit 6.8% by the end of this year from 7.32% on September 30 -- far short of its 7.5% target.
Expect more unpleasantness -- like a cash dividend cut -- as Citi stock continues to tumble. But I think if it hits $15, it may be worth considering an investment.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in Moody's securities.
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Reader Comments (Page 1 of 1)
12-14-2007 @ 9:43PM
doug alder said...
What a bunch of bullshit. I guarantee you this guy benefits big time if the stock goes down. Probably owns 1 share, short 50,000.
12-14-2007 @ 11:19PM
Jerry Nemiroff said...
I have heard of sensationalism but your comments and price target takes the cake. I would liken your comments equal to yelling fire in a crowded auditorium. Your take here is that this organization is of no real value. Smith Barney is worthless, Citibank the same,etc. This is the same entity that has earned 20-25 billion annually for the last several years. Are you suggesting that they for all practical purposes may not survive and thrive again in the forseeable future? I believe your comments to be over the top. I agree that quite possibly you most likely have ulterior motives. You are currently "king of the low ballers."
12-15-2007 @ 10:40AM
Silent Movies said...
This sounds precisely what I did when MO hit 18.(Because of Kessler) I bought MO of MO. (LOL)
The rest..as they say, is history.
But if the dividend goes, I might too , as well.
12-15-2007 @ 11:15AM
al said...
I agree with Mr. Cohan 100%. I really don't care what his personal motives are, C is up the creek without a paddle. There is much more financial pain to come. They have only put approx. one-half of the SIV's on the balance sheet. Does anyone really believe that the other half is risk free?
On the consumer side they have lost considerable market share and the staff is demoralized (who can blame them). Unfortunately, there will need to be significant staffing cuts made to improve the P&L which will just drive morale lower but Pandit has no choice.
He needs to perform simultaneous surgery on three or four parts of the corporate body to save the enterprise. The Board and shareholders in general will give him no more than 9-12 months to turn the ship around.
That is not time enough to implement stategic changes so the harsh realities of staff and dividend cuts along with perhaps some divestitures are the olny viable actions.
short term the share price will nose dive. What do you think will happen in early January when they book $11 B and wipe out 4Q'07 ?
12-15-2007 @ 1:35PM
ranger said...
Citi is fxd. but I think 30 level is safe, in a week where it weathered a) Pandit -new CEO- bottom of the barrel choice b) SIV on balance sheet c) Morgan Stanley "best short of the year" smack down, this train wreck of a stock actually held the 30 level and behaved rather healthy within teh 30.25 and 31.25 range.
I think there is more risk being short this stock than long it. Pandit is smart, and he's super pissed that many view him as maladroit, the board will give him whatever room he needs insofar as the changes he wants to make- why not if they don' work they can and will simply put the blame on him. All this said, I think Pandit will split C into 2 parts, Consumer Finance/Bank and Corporate Investment Banking. He will retain the CEO role of the Inv Bank and appoint Bischoff the CEO of the Consumer Bank, or simpy buy a great opertaor with the chops to run a bank ( Regions, Santander or my favorite SocGen) and let the two part trade independently but with one Chairman, here is where Hank Paulson, Corzine or Wolfson would come in handy). This would re-energize C like a bat out of hell, the stock woudl promptly rip up to the 40s since the market would finally have the "great unlocking of value" moment its been so anxiously awaiting.
12-15-2007 @ 11:30AM
Marc said...
A little positive music please.
Let's all meet again next year.
Citi will survive and profit.
My money is on Pandit....
12-16-2007 @ 11:22AM
Jerry Nemiroff said...
What Cohan has done here is the equal to "yelling fire in a crowded auditorium." The value of Smith Barney and Citibank alone plus the consumer finance business far exceed the current share price even taking into account the terrible mess that Prince made of a AA+ rated organization. Sanity should prevail and Citi will regain it's footing over the coming year. No sensationalism please, Mr. Cohan.
12-16-2007 @ 10:11PM
Dale De Vine said...
I am taking a wait and see. Don't panic. No pain, no gain.
12-17-2007 @ 11:14AM
strellson said...
This idiot obviously has no understanding of Citi's balance sheet, and thinks re-hashing some negative article will pass for analysis - I'd hate to be his client.
Pandit has done the smart thing by moving the SIV's onto the balance sheet, the dividend is a lot safer than all the 'experts' seem to realize, and the core business units continue to print $$ at an astronomical rate - look at their free cash flow even after all the losses last quarter. Sure, the stock may trade down a few more points, but only a suicidal maniac would risk shorting it here.
12-31-2007 @ 11:21AM
greggaines said...
WHAT A MORON WRITING THIS ARTICLE. WHAT KIND OF DUE DILLIGENCE DID YOU DO, OR ARE YOU INTELLIGENT ENOUGH TO HANDLE THE LARGE NUMBERS THAT RUN OF THE MILL WRITERS LIKE YOU DECIDE TO WAKE UP ONE DAY AND BLOG. LISTEN SPORT, I'D AGREE THAT THE BLEEDING AIN'T DONE AT CITI AND ANY FOOL WILL KNOW THAT THE DIVIDEND WILL BE CUT. PRINCE AL-ALWEED AND EDDIE LAMBERT HAVE HUGE STAKES IN CITI. DO YOU HONESTLY THINK THEY'RE GONNA SIT ON THEIR ASSES AND LET CITI DROP TO 15.00 DOLLARS A SHARE? MAYBE I CAN GET A JOB BY THE NIMWIT THAT HIRED YOU. I PROMISE MY ARTICLES WOULD MAKE MORE SINCE. BOARD SHAKEUPS ARE THE NEXT EVENT COMING FROM THE ALWEEDS OF THE WORLD. AND REMEMBER, THERE WILL BE MORE CAPITOL INFUSIONS FROM THE FOREIGNERS OF THE WORLD OR EVEN WARREN BUFFET WHO RECOGNIZES FIRE SIDE SALES - PROBLEM FOR YOU IS IT WILL BE WAY BEFORE 15.00 DOLLARS A SHARE. WHAT A BAFOON YOU ARE.